You are not the only one who gets intimidated by the unfamiliar VAT jargon. There are many others, too. In this article, our VAT tax specialists in London simplify some of the most important VAT terms for you. Keep reading to find out.

Reverse Charge

Reverse Charge refers to the practice where the customers make VAT return entries that the vendor or supplier normally makes. In what is considered a move to curb fraud, the government has extended the scope of the Reverse Charge Principle to several construction supplies. The move aims to stop construction suppliers from charging 20pc VAT on sale invoices to another builder and then never submitting the same to HMRC.

As a result of this decision, suppliers can’t charge any VAT to builders on supplies; instead, the builders do the reverse charge on their VAT returns.

It is pertinent to mention that purchasing services from abroad (EU or from any part of the world) also falls under the scope of the Reverse Charge.

Partial Exemption

Depending on your referral point, the input taxes and exempt supplies can have as many as 3 different descriptions:

  • Residual Input Tax
  • Non-Attribute Input Tax
  • The Pot
VAT tax

Economic Activity

The aforesaid is an EU term. The UK taxation law refers to the same as “Business Activity”. You, or any entity, can only register for VAT if it makes taxable sales ‘in the course or furtherance of any business carried on by him’ (Value Added Tax Act 1994 Section 4).

When it comes to classifying something as “business”, there exists ambiguity and disputes. Our tax specialists have given 2 tips to clear the ambiguity. These are:

  • An activity doesn’t need to generate profit to be classified as a business.
  • When it comes to one-off sales, like those of buying a house to sell at profits, they can still be classified as a business.

Elect to Waive Exemption

This term refers to matters related to property and land and the decision of the tenant or landlord to charge VAT on future income. The easy term for the same would be “opt to tax” instead of “elect to waive exemption”. Let us explain it with an example:

Statement 1: Mr. XYZ bought a commercial property and made an election with HM Revenue & Customs to waive exemption on supplies connected to the building.

Statement 2: Mr. XYZ bought a commercial building and “opted to tax” it with HM Revenue & Customs so that he can charge VAT on incomes that he will earn by renting the property.

In the prima facie, both statements refer to the same thing, but statement 1 confirms that income generated from the property will “not be exempt,” whereas the 2nd statement confirms that income generated by renting a building will be standard rated.

Taxable Person

This term or phrase will have made you believe that any entity or business that is registered for VAT is classified as a “Taxable Person,”right?

But that isn’t the case. Taxable Person refers to any entity or business that is either already registered for VAT with HMRC or should be/have registered. For instance, a business that makes £150,000 in taxable sales but hasn’t registered for VAT on time will be considered a taxable person from the date it should have registered as the same.

It is pertinent here to mention that a “person” registers for VAT, not a business because the VAT system works on legal entities.

For instance, there’s a taxi driver who is registered for VAT. The same taxi driver also has an extra source of income as he rents out property on Airbnb. Now the taxi driver has to account for VAT on both sources of income. On the other hand, if the same taxi driver owns property in joint names, then this would be classified as a partnership for VAT purposes that will be a completely separate entity to his taxi business/income.

Place of Supply

Place of Supply refers to the place or country where VAT is applicable. It means that if your supply territory is the United Kingdom, then the entity will be subject to UK VAT. Likewise, if it is outside of the UK, then UK VAT is not applicable.

When it comes to B2B services, Place of Supply is the customer’s country (the place where the customer is based). On the other hand, Place of Supply in B2C services is the place/country where the supplier is located.

Multiple Supply or Mixed Supply

Mixed Supply or Multiple Supply refers to the business that supplies two or more different services or goods against a single price tag with different VAT rates.

In such cases, the main focus is to see which item is “incidental” and thus can be ignored for VAT purposes. This makes another item “main supply,” and VAT liability is fully based on it. In case there is more than 1 main supply, you should apportion output tax in a reasonable and fair manner.

Person writing on a document

If you want to learn more about VAT matters, hire our VAT services. We can help your business deal with VAT registration, planning and returns.

IBISS & CO has leading chartered tax advisers & accountants. We offer property tax advice, inheritance tax planning, VAT consultation, and much more. Contact us for details.

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